When you make an earnest money deposit to buy a new home, the check doesn’t go directly to the seller. Instead, it goes into escrow.
What does that mean?
Escrow is when a third party holds something of value. That third party should be neutral; they shouldn’t care who comes out ahead in the transaction, the buyer or the seller. When it comes to real estate transactions, escrow is held until all of the obligations of the contract have been fulfilled.
Your escrow account will close on closing day (see where the name comes from?) when the title will be transferred to the buyer and the money will be transferred to the seller.
You’ll also encounter escrow accounts when you work with your mortgage lender. Your monthly mortgage doesn’t just contain money to cover the cost of your loan. In most cases, it also includes a portion of your annual or semi-annual homeowners insurance and property taxes. Your lender holds these funds in escrow and pays them out when those bills are due.